For many years, there was a consensus, among investors and the businesses they bought shares in, that companies should focus on maximizing shareholder returns above all else. Environmental, social and governance (ESG) issues were irrelevant to financial performance, it was agreed, and if you did consider them, you would damage your returns.
This consensus is starting to crumble as the evidence mounts that considering sustainability issues is not a drain on earnings – and, in fact, improves performance. “The impression among business leaders is that ESG just hasn’t gone mainstream in the investment community,” said the Harvard Business Review last year. “That perception is outdated.”
Investors are increasingly aware of the importance of the climate crisis, water shortages, health and safety in the supply chain, modern slavery, and corruption to their bottom lines. Volkswagen’s Dieselgate and Boeing’s 737 Max scandal are just two incidents that reveal that ESG issues are not only material to a company’s financial performance – they can have a huge effect on it.
Indeed, armed with increasing amounts of high-quality data, investors are becoming ever more assertive in calling for companies to deal with ESG issues. Even the U.S. Business Roundtable, which did much to champion the supremacy of shareholder rights, has changed its position to declare that the purpose of a corporation is not just to serve shareholders but “to create value for all our stakeholders,” including customers, employees and local communities.
The performance of this year’s Global 100 (G100) companies bears out this analysis; since its inception in 2005, up to Dec. 31, 2019, the “index” has outperformed the MSCI ACWI (All Country World Index), returning 7.3% on an annualized basis against the ACWI’s 7.0%.
At the same time, the G100 outperforms on a number of ESG criteria, including average CEO pay ratio (76:1 against 302:1), the number of women on their boards (30% vs 24%) and female executives (20% vs 17%), as well as whether they link executive compensation to targets related to the UN Sustainable Development Goals (SDGs).
Another key area in the list where sustainability and financial performance collide is the carbon-productivity measure of revenue per tonne of CO2 emitted. Carbon productivity is becoming increasingly important as a business issue, and here the G100 members have a clear advantage, earning $384,077/tonne against the ACWI’s $173,600 on a weighted basis. It is also notable that the proportion of the G100’s revenues that derive from “clean” sources has risen to 37%, from 26% last year.
The ultimate measure of sustainability is the ability to endure and thrive in the long term, and here it is striking that the average age of G100 companies – at 83 years – is almost double that of the 49 years for companies in the ACWI.
The ranking was topped by Danish renewable energy provider Ørsted, followed by its compatriot – and last year’s top-ranked company – Chr. Hansen, a biosciences company. In fact, the Danes occupy three of the top six places, rounded out by biotechnology firm Novozymes, in sixth spot (its enzymes enable higher crop yields, renewable fuels and more). You’ve got to wonder what’s in the water in Denmark.
Third was another Nordic company, Finland’s Neste, an oil refiner that is switching from refining crude oil to using cooking waste and other materials as a feedstock. Fourth was U.S. technology conglomerate Cisco, which rose 10 places from 14th, thanks to more than $25 billion in clean revenues from products with environmental core attributes. American software group Autodesk, which came fifth, rose 43 places from its 2019 ranking, now that it uses 99% renewable energy to run its cloud platforms – platforms that help build green buildings, reduce materials in manufacturing life cycles and support better designs for the circular economy.
These were among the European companies that make up almost half (49) of this year’s G100. The U.S. and Canada accounted for 29, while 18 companies in the ranking are from Asia. Latin America boasts just three members of the list, all from Brazil, and South Africa’s Standard Bank was the only representative of the African continent.
The companies included in the G100 represent a wide range of sectors, from aerospace and apparel to wireless telecoms groups and wholesale power companies. The largest sector was financial services, with 18 representatives, including 12 banks, suggesting that investors and lenders are more advanced in their understanding of how taking sustainability issues into account can help their business performance.
The list includes 28 companies that were not on the Global 100 last year; Canada boasted nine of those entrants, suggesting that the business community here is starting to take the issue more seriously. As well, BYD – China’s biggest electric car maker – is a new entrant, along with Hong Kong’s Vitasoy, evidence that while the world’s largest economy lags behind European and North American nations on key sustainability metrics, ESG issues are starting to gain traction where it will matter most.